Factoring is on the rise: last year this market reached a total turnover of 61.2 billion euros, resulting in an impressive growth of as much as 10.5%. BNP Paribas Fortis' market share rose slightly from 38.4% to 38.6%.
Ignace De Keyser, Sales & Marketing Director at BNP Paribas Fortis Factor, explains the increasing success of factoring.
How is the Belgian factoring market developing? Do you see any marked trends?
‘The growth figures speak for themselves: factoring is clearly becoming more important. Factoring used to be more of a support mechanism, but today it is a mainstream solution easily competing with banking solutions. This obviously has to do with the liquidity crisis and the successive measures.
Factoring is not entirely comparable with a banking solution, of course. Factoring offers companies more than just flexible financing. The factoring range also includes credit management and hedging, although these services have receded into the background somewhat in recent years. Factoring owes much of its popularity to the financing aspect.
The lingering economic uncertainty, the search for new markets and the realisation that 'too big to fail' is really an illusion are forcing companies to protect their low margins. More and more entrepreneurs are adding this element to their factoring solution.
Credit management outsourcing is also on the rise again. Many larger companies had already professionalised this area, but are now outsourcing all non-core business as much as they can.
BNP Paribas Fortis Factor has always held this service close to its heart. Our customers can therefore rely on a specialised team that guarantees continuous follow-up both here and abroad.’
What are the reasons for this change of attitude?
‘There are two main reasons for it. First and foremost, our services and operating methods have changed radically in the last few years. That is largely due to the development of new communication technology. Some years ago, all communication was still by mail or fax, bills had to be processed and entered in the system manually, and reporting was also done manually. In brief, it was a time-consuming process with more potential for mistakes.
Nowadays the vast majority of our customers transfer all their data electronically, directly from their accounting program. As a result, the entire process – from the customer drawing up bills to receipt of the funds – takes two days at most, depending on the quality of the file sent to us. And there is much less risk of mistakes. Thanks to these innovations, factoring is now much quicker and more straightforward than before, which has also meant a reduction in the cost for our customers.
Secondly, there has been a major change in the target group and the use of factoring. In the past, banks suggested factoring to customers that had become too risky to finance using conventional loans. In other words, it was a last-ditch form of short-term funding that provided the bank with much greater protection in the event of the customer going bankrupt. Consequently, some companies were more or less forced to use factoring and were not overly pleased with it. Add to that the administrative switch and it's easy to see why factoring got a bad reputation. The most oft quoted argument against factoring was fear of what customers would think.
The turnaround came some years ago with the introduction of the new Basel II standards, whereby banks were required to maintain a capital buffer to cover their risky activities. The buffer for factoring was significantly lower than for conventional loans, making factoring a more attractive option for banks. As a result, they started to offer factoring to customers with a good credit rating, who in turn began to see its potential.
On the back of these two changes, an increasing number of companies are using factoring to boost their working capital, and for a longer period. Twenty years ago a customer would be with us for an average of two to three years, but that has since doubled.’
Will Basel III intensify this trend?
‘There can be no two ways about it. Basel III has made banks subject to even stricter capital requirements, which can only make factoring a more attractive option. What is more, the new standards focus much more on liquidity. In this connection, the operational relationship between the bank and the customer plays an important role: if a company entrusts its cash flows to a bank, it can regard the risk of loss of liquidity as low and maintain a lower liquidity buffer. In this respect, too, factoring hits the mark.’
So what makes factoring such an attractive option for companies?
‘A financially sound company can benefit by outsourcing the administration of its accounts receivable to us. While we monitor the receivables, the customer can focus entirely on business. And in the vast majority of cases, we are able to collect amounts due 25% more quickly than the customer. Thanks to our experience – we know all of the most commonly used excuses – and reputation, we can encourage debtors to honour their payment terms. After all, no-one wants a financial partner to think that they are an unreliable payer.
More importantly still, factoring is a more flexible form of funding than conventional bank loans. That is because funding develops in line with turnover: if turnover increases, the company issues more invoices, and funding rises too. Factoring is therefore a very attractive option for developing companies.
The "off-balance-sheet" aspect of factoring is another deciding factor. This not only improves the company’s balance ratios, but also has a positive impact on the cost and availability of the company's other credit facilities.’
Is this typically a product used to cope with a crisis?
‘No, definitely not. Factoring is especially popular when economic conditions are volatile, which means periods of crisis and of growth. In such circumstances, it is essential for companies to be able to convert their receivables to cash quickly. This is less important when the economy is stable or less volatile.
That is why the factoring market expanded so considerably in 2009-10, when the financial and economic crisis was at its worst. Because debtors were taking longer to pay, many companies had to contend with cash-flow problems. Quicker collection of bills can go a long way towards reducing that pressure. That is particularly so if you combine quicker collection with a package that includes cover against the non-payment risk and debtor default.
However, factoring is also an attractive option when the economy is improving. If companies receive more orders and turnover increases, there can be cash-flow problems because their working capital need is higher. So factoring is a highly flexible means of funding the working capital requirement based on increasing receivables.
It is not therefore a product just for times of crisis; it can be beneficial for any company. And the best way to prove the effect of factoring is simply to try it out.’
How does factoring work?
The principle behind factoring is simple: you assign your receivables (invoices) to a third party – the factor – with or without cover for the risk of non-payment. When you send your invoice to the debtor, the factoring company can pay an advance of up to 85% of the amount. That means you don't have to wait for payment and have immediate access to the funds. The factoring company is also responsible for monitoring and collection.
You have the option of using the following services, depending on your company's specific requirements:
Outsourcing of your accounts receivable administration
If you select this option, you assign all or some of your receivables file to the factoring company in exchange for a factoring fee. The factoring company performs the following tasks:
- entering invoices and credit notes after a thorough check and then updating the debtor data;
- checking and allocating incoming payments, including a check on partial payments and payment or invoice references;
- drafting and providing online reports and statistics, so that you always have a clear idea of the status of outstanding receivables and payments already received.
Good to know
The factoring company performs a thorough analysis before taking over your accounts receivable. It may decide to exclude some debtors contractually, for instance if they have a particularly poor credit rating, if they are natural persons or associated enterprises, operate in countries with a high default risk or have stated that they do not wish to pay via factoring.
Monitoring and collection of your outstanding invoices
In this case, the factoring company is responsible for collection of your outstanding receivables and following up on debtors by phone and with written reminders. This means you have more time to build up good relationships with your customers.
In practical terms, you issue your invoices and send them electronically from your accounting program to the factoring company, which is then responsible for collection and follow-up. Because of its expertise and experience, the factoring company is generally able to collect payment of the invoices 25% more quickly than your own accounts department. And as a third party, it is often more successful when it comes to payment notices.
You can track the entire process via an online application, so you are always aware of changes in your receivables portfolio. For instance, you can consult detailed information on your outstanding invoices, credit notes, payments and disputed payments at any time.
Advances based on the amounts of your invoices
In addition to outsourcing their receivables management, many companies that use factoring also call upon advances based on their outstanding invoices.
In this case the factoring company advances a percentage of the invoice amount (usually between 75% and 85%) immediately after receipt of the invoice. You receive the balance when the debtor has paid the factoring company. You pay interest on the amount advanced.
This form of advance has distinct advantages:
- You generate additional working capital on the basis of your outstanding receivables.
- You improve your cash position, so it is easier to invest or enter new markets. In addition, as a quick payer you can request healthy discounts from your suppliers.
- There is a direct link between your available funds and turnover growth: more sales means more funding for your company's continued growth.
Cover for the non-payment risk
Factoring companies offer various packages so that you can obtain 100% cover for the risk of non-payment of your outstanding invoices. That means you don't have to worry about the possibility of your debtors defaulting. This additional certainty of payment also makes it easier for you to offer more flexible payment terms, which could give you a considerable competitive edge.
The following risks are covered:
- Proven insolvency, for instance as a result of bankruptcy or judicial settlement.
- Probable insolvency: when the debtor has still not paid within a contractually agreed deadline after the due date of the invoice (usually ninety days).
If one of your debtors defaults, the factoring company will pay the entire amount of the invoice, within the predetermined credit limits, within the agreed deadline after the due date of the invoice.
Good to know
A credit insurance policy is also particularly useful to safeguard your export transactions.Through the credit insurer, you have access to:
- information on the credit ratings of your foreign debtors
- information on the specific risks associated with the country of destination
- bank and customs guarantees with your foreign trading partner
- a collection service if your foreign debtors don’t pay their invoice
What are the advantages of factoring?
Less risk, more working capital and, more especially, more time to focus on your core business. These are but a few of the benefits of factoring.
Do you frequently have a problem with unpaid invoices or late payment by your debtors, and does chasing this take a lot of time that could be devoted to selling?
Would you like to avoid the risk of non-payment and free up extra resources? If so, factoring could be the solution.
What are the advantages of factoring for your company?
You save time and money
By assigning your receivables administration to an external partner you can convert fixed costs to variable costs. Not only do you reduce your general operating costs and staff expenses, but you no longer need to constantly invest in new or changing technologies. You will also experience fewer problems in the event of extended absence, the departure of administrative staff or a temporary increase in the workload. However, the major advantage is that you have more opportunity to expand your business because you can devote more time to your customers.
You avoid non-payment
Because the factoring company examines your receivables portfolio thoroughly, you have a better idea of your debtors' creditworthiness. This screening can also apply to your domestic and foreign prospects. This means you always operate on the basis of reliable trade information and don't waste time and energy on high-risk debtors. And thanks to its expertise, the factoring company will also be able to act more quickly to stop any attempts at fraud.
If you also opt for cover for the risk of non-payment, you can obtain up to 100% cover for default. In this way you avoid cash-flow problems due to unpaid invoices and protect your investment in your company. Because the factoring company pays you the compensation after a pre-arranged deadline, you can have more reliable cash planning.
You free up more working capital
Debtors tend to pay their invoices more quickly to a factoring company than directly to the supplier. As a result, the average "days sales outstanding" (DSO) of your receivables is lower, which means your company needs less additional financing and therefore makes a direct saving on interest.
What's more, you collect payment more quickly without putting pressure on your debtors or tightening up your payment terms, which is always delicate in a commercial relationship.
If you also receive advances on your invoices from the factoring company, you avoid pressure on your cash flow. That is because your financing is linked to your turnover, so you can always cover any extra requirement for working capital based on your receivables.
You have a stronger negotiating position due to better ratios
Under certain circumstances, factoring products with risk cover make it possible for you to work off-balance-sheet. This means your balance sheet is more concise, your net debt is reduced, and your company's liquidity and solvency ratios improve. As well as having a positive impact on the cost of service from your bank, this also influences your suppliers, major debtors and credit insurance companies when assessing their risks.
You can keep close track of your debtors
Thanks to the online monitoring and reporting, you can keep up to date with changes in your receivables portfolio. For instance, you can consult information on outstanding invoices, credit notes, payments and disputes at any time and you know the exact state of your cash flow.
And for your debtors?
- Thanks to the intervention of the factoring company, you have more certainty of payment, which means you can offer your debtors longer payment terms.
- With every collection, the factoring company provides your debtor with clear reports, so that it is easy for them to keep a track of their payments.
- Foreign debtors don't have to provide supplementary guarantees.
Factoring: what about the risks?
By outsourcing your billing, you can save a lot of time, energy and resources. But what about the risk?
That depends on the agreement you have entered into with the factoring company:
- With non-recourse factoring, you assign the risk of non-payment of the invoices to the factoring company. This means provision of cover for non-payment up to 100% of the amount of the receivable, but within predefined limits.
- With recourse factoring, your company bears the risk of non-payment of invoices. If the factoring company doesn't manage to obtain payment from a debtor after a certain time and repeated reminders, it will claim the amount concerned from you.
In that case, you will have to try to obtain payment of the outstanding amount from the debtor concerned through judicial collection. You can call upon the services of a bailiff or collection agency for this, but most factoring companies also offer this service.
In its risk assessment and pricing, the factoring company will of course also take account of the quality of the receivables portfolio.
Cross-border factoring: better risk management
If you do business abroad, and particularly if you export, it is also advisable to transfer the monitoring, risk cover and funding of your foreign receivables to a factoring company. Why choose cross-border factoring?
- Default cover, since it is not always easy to assess a foreign debtor's creditworthiness.
- Legislation and trading practices regarding billing can vary considerably from one country to another. If you handle collection yourself from Belgium, lack of knowledge of local practices could cause problems.
- Better risk management. If your foreign debtor goes bankrupt, the local branch of your factoring company has a stronger legal basis to collect any outstanding invoices.
The actual services offered by the factoring company depend on how your company operates.
- You export and bill your foreign debtors yourself
In that case, the factoring company can collect and monitor receivables in most countries and provide funding and cover. This is done through a network of affiliated companies or correspondent factoring companies.
- You issue invoices through your foreign subsidiaries
In that case, the factoring company will offer your various subsidiaries a factoring agreement through own its local units. That means your local staff can call on the services of local experts, using their own language and in accordance with local trading practices.